Why US and European oil demand is lifting tanker rates and stocks

Global oil consumption doesn’t have a direct impact on tankers, but it should have a positive impact on imports and tanker demand. In its recent earnings call, Teekay Tankers Ltd.’s (TNK) managers noted that the oil inventories in developed economies fell 1.5 million barrels a day in the fourth quarter of 2014—the steepest quarterly decline since 1999. While the extremely cold weather played a part, Teekay managers said it’s “also a reflection of better levels of underlying demand than were previously forecast.”

After a poor 2012, U.S. oil consumption bounced back, rising from about 18.3 million barrels a day in 2012 to ~19.0 million barrels a day in 2013. Cheap credit and improvements in the economy continued to fuel the stock market and drove sentiment higher. Industrial and manufacturing activity rose, and purchasing managers became more upbeat. U.S. GDP (gross domestic product—a measure of economic activity) improved throughout 2013. The labor market continued its slow recovery, and people drove more as the economy appeared to be recovering.

Fundamentals started to bottom in Europe throughout 2012 as policy switched from austerity to pro-growth. A crisis was averted, and few people spoke of a crisis anymore. Money started flowing back into Europe as investors became more confident in the continent. In 2013, year-over-year growth in oil and other liquid fuel consumption became positive. Recovery was initially weak, but leading indicators such as the purchasing managers’ index, or PMI, eventually continued their turnaround.

The IMF currently forecasts global GDP to grow faster than 2014. But we’re not sure about its track record. Plus, the outlook and fundamentals change. So investors should follow indicators such as oil consumption, global manufacturing PMI, and inflation rates regularly to keep track of economic trends. If the world economy does poorly, so will tankers like Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), Nordic American Tanker Ltd. (NAT), and Tsakos Energy Navigation Ltd. (TNP) as well as the Guggenheim Shipping ETF (SEA). For investors who believe economic activity goes in cycles, estimated growth for 2013 is relatively low in the context of the last ~20 years. With global inflation weak or weakening and central banks maintaining pro-growth policies, economic growth might just turn up this year, supporting tighter fleet utilization.

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